Driving economic growth and stability Role of Islamic banking

Md. Saiful Islam Masum :

Bangladesh has experienced significant economic growth over the past few decades, and a key factor contributing to this growth has been the emergence of Islamic banking in the country. As a predominantly Muslim nation, Islamic banking has played a crucial role in driving financial inclusion and fostering economic development in Bangladesh.

Islamic banking operates on the principles of Shariah law, which prohibits the payment or receipt of interest and prohibits investment in businesses considered haram (forbidden) according to Islamic law. This unique approach to banking has provided access to financial services for a large segment of the population that previously had limited or no options for banking.

Moreover, Islamic banking in Bangladesh has not only expanded access to financing but also contributed to the overall stability and resilience of the financial sector. By promoting ethical and sustainable financial practices, Islamic banks have helped mitigate the risks associated with traditional banking practices and supported the growth of small and medium-sized enterprises (SMEs).

In addition, the principles of profit and loss sharing inherent in Islamic banking have fostered a more collaborative approach to financial transactions, which has contributed to the overall growth of the economy. As a result, Islamic banking has become an integral part of the economic landscape in Bangladesh, and its role in driving economic growth cannot be understated.

In this article, we will explore the specific ways in which Islamic banking has influenced the economic growth of Bangladesh, including its impact on financial inclusion, sectoral development, and overall stability. We will also examine the challenges and opportunities facing Islamic banking in the country and its potential for further catalyzing economic growth in the future.

Islamic banking in Bangladesh has made significant contributions to the national economic growth in several ways:

Financial inclusion: Islamic banking has played a crucial role in promoting financial inclusion in Bangladesh. By offering Sharia-compliant financial products and services, Islamic banks have reached out to segments of the population that were previously excluded from the formal banking sector. This has helped to increase access to finance, promote savings, and encourage entrepreneurship, thereby contributing to economic growth.

Investment in productive sectors: Islamic banks in Bangladesh have focused on financing productive sectors of the economy, such as agriculture, small and medium-sized enterprises (SMEs), and infrastructure development. This has helped to channel funds towards sectors that have a direct impact on economic growth, job creation, and poverty reduction.

Stability and resilience: Islamic banking in Bangladesh has demonstrated resilience during times of economic crises. The principles of risk-sharing and asset-backed financing followed by Islamic banks have helped to mitigate risks and promote stability in the financial system. This has contributed to overall economic stability and confidence in the banking sector.

Foreign investment and trade facilitation: Islamic banking has attracted foreign investment and facilitated trade in Bangladesh. Many international Islamic banks and financial institutions have established operations in the country, which has helped to promote foreign direct investment and enhance trade relations with other Islamic countries.

Ethical and responsible financing: Islamic banking operates based on ethical and responsible financing principles, which align with the values and aspirations of the Bangladeshi society. This has helped to promote sustainable and socially responsible economic development, including investments in environmentally friendly projects and socially impactful initiatives. Islamic banking has experienced significant growth and resilience in Bangladesh over the past few decades. This can be attributed to several factors:

Favorable regulatory environment: Bangladesh has created a conducive regulatory framework for Islamic banking, which has helped to promote its growth. The Bangladesh Bank, the central bank of the country, has introduced various policies and guidelines to support the development of Islamic banking.

Increasing demand for Sharia-compliant financial services: Bangladesh is a predominantly Muslim country, and there is a growing demand for Islamic financial products among the population. Islamic banking offers an alternative to conventional banking, which is in line with the religious beliefs and values of the people.

Strong support from the government: The government of Bangladesh has been supportive of Islamic banking and has taken various initiatives to promote its growth. This includes the establishment of Islamic banks and financial institutions, as well as the introduction of Islamic banking products and services.

Growing awareness and education: There has been an increased awareness and understanding of Islamic banking among the general public in Bangladesh. This has been facilitated by the efforts of Islamic banks and financial institutions to educate the public about the principles and benefits of Islamic banking.

Innovation and product diversification: Islamic banks in Bangladesh have been innovative in developing new products and services to cater to the needs of their customers. This has helped to attract a wider customer base and promote the growth of Islamic banking in the country.

Over the span of last four decades, Islamic banking in Bangladesh has made significant step, securing a extensive market presence. Shariah-based banking commands significant market shares in various sectors, with a breakdown as follows: 26 per cent in deposits, 26 per cent in imports, 24 per cent in exports, 39 per cent in remittances, 27 per cent in industrial finance, 17 per cent in agricultural investment, and 38 per cent in Cottage, Micro, Small, and Medium Enterprises (CMSME) investment.

Immense Contribution to Employment generation by Islami Banks are also remarkable in Bangladesh. Islamic banking has played a crucial role in generating employment opportunities for approximately 120 million individuals in Bangladesh. This is a noteworthy social impact, as employment creation is very important for the country’s economic development and poverty diminution. The Islamic banking sector has become a large contributor to job formation, which is a authentication to its broader socio-economic significance.

Notably, Islami Bank Bangladesh Limited (IBBL) stands out with its incredible contribution of US$12 billion to the nation’s reserves since its establishment. (Source: IBBL Website) This makes obvious the financial power and steadiness of Islamic banks in the country, which is essential for maintaining economic resilience and growth.

In our country, within the banking sector, Shariah-based banking accounts for a significant 50 per cent share of Corporate Social Responsibility (CSR) inventiveness, with IBBL alone contributing an impressive 29 per cent to this noble cause.(Source: IBBL Business Report) This reflects the commitment of Islamic banks to give back to society and support various community and welfare programs.

These CSR efforts include a spacious range of actions, including education, healthcare, poverty alleviation, and environmental conservation. By enthusiastically engaging in these initiatives, Islamic banks are not only contributing to the well-being of the community but also nurturing a optimistic reflection of the industry.

As per various study on Islami Banks in Bangladesh shows that Presently, Islamic banks command a substantial market share, accounting for 25.81 per cent of total deposits and 29.20 per cent of investments. According to data from the Bangladesh Bank, these figures have shown significant growth since 2017 when they were 23.13 per cent and 23.81 per cent, respectively.(Source: Bangladesh Bank) .

This strapping intensification is a demonstration to the mounting recognition and acceptance of Islamic banking in Bangladesh. It reflects the buoyancy that individuals and businesses have in the principles of Shariah-based finance. The growth in deposits and investments also indicates the sector’s pliability and constancy in the face of economic challenges.

Now a days, many conventional banks are focusing on Islamic products, either by opening new Islamic branches or windows, or by converting into full-fledged Islamic banks.( Source: Bank Porikroma). Bangladesh entered the shariah banking era with the establishment of Islami Bank Bangladesh Limited in 1983.The Rapid success of the IBBL has acted as an persuading dynamics in opening other shariah-based banks and Islamic financial institutions in the country. (Source: IBBL Website).

At present, 10 full-fledged Islamic banks are operating in Bangladesh with 1,605 branches – out of the total 10,974 bank branches – throughout the country.The banks are Islami Bank Bangladesh, ICB Islamic Bank, Al-Arafah Islami Bank, Social Islami Bank, Shahjalal Islami Bank Limited, Export Import Bank of Bangladesh, First Security Islami Bank and Union Bank Bangladesh. In addition, 23 Islamic banking branches of 11 conventional commercial banks and 511 Islamic banking windows of 13 conventional commercial banks are also providing Islamic financial services in Bangladesh.(Source: Bangladesh Bank) .

The Islamic banking method of extending interest-free credit usually serves the purpose of financial inclusion as it empowers poor people.

According to lead economists of the country, the key reason behind the popularity of Islamic banking is that many people want to avoid receiving or paying interest as it is prohibited in Islam.Islamic banks refrain from accepting or paying any interest on any transaction as any kind of pre-determined or fixed profit rate on investment or deposits is considered riba or interest.

The research review findings on Islami Banking demonstrates that In 2014, the number of depositors at the Islamic banks in Bangladesh were 1.17 crore and the figure hit 2.85 crore at the end of September 2022.The Islamic banks accounted for a 37.63 per cent share in the total remittances handled by the country’s entire banking sector during the July-September period in 2022.

The total number of jobs in the Islamic banks soared to 49,433 at the end of September 2022 from 27,662 in September 2015. The Bangladesh Bank issued the maiden sovereign investment sukuk on December 28, 2020 to raise Tk 8,000 crore for the implementation of a safe water supply project across the country.

(Source: Bangladesh Bank). The Bangladesh Government Islamic Investment Bond was introduced in 2004. It was the only approved shariah-compliant security other than the newly issued sukuk to maintain the SLR by the Islamic banks.

Islamic banking in Bangladesh has contributed to national economic growth by promoting financial inclusion, financing productive sectors, ensuring stability, attracting foreign investment, facilitating trade.Overall, the resilience and growth of Islamic banking in Bangladesh can be attributed to a combination of favorable regulatory environment, increasing demand, government support, growing awareness, and innovation in product offerings.

(The writer is a banker and certified expert in Credit Management).